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Q-and-A: MetLife’s Tom Hogan on ERISA fee-disclosure rules

5 min read

Modern Money

The Labor Department recently offered guidance to sponsors of retirement plans under the Employee Retirement Income Security Act regarding what constitutes “reasonable compensation” for plan service providers. That guidance came in the form of an interim final regulation, with a final rule expected by the end of this year. MetLife recently produced a white paper on the subject, and Tom Hogan, senior vice president of MetLife Resources, answered SmartBrief’s questions regarding the new guidelines.

How has a prior lack of guidance affected ERISA plan fiduciaries in meeting their responsibilities?

ERISA plan sponsors have numerous fiduciary responsibilities, including the requirement to pay reasonable compensation for plan services. For most of these fiduciary responsibilities, the Department of Labor and the courts have provided guidance and interpretations which have helped plan sponsors meet their fiduciary duties, but not when it came to plan fees.

In essence, plan sponsors have been left to their own processes and procedures to review and analyze the fees and expenses paid for plan services. This has been a difficult task since the DOL did not define “reasonable fees” and there were generally no uniform up-front service provider fee disclosure requirements. This resulted in inconsistencies in the methodology used by plan sponsors to determine reasonableness of plan fees. The DOL fiduciary level fee disclosure regulations will make it easier for plan sponsors to analyze and understand the direct and indirect fees paid to service providers.

What are some steps a fiduciary can take to ensure it is properly evaluating the fees charged by its plan service provider?

An important first step for plan fiduciaries is turn to their service providers for access to tools, resources and educational outlets to help them understand the new DOL fee-disclosure regulations. Likewise, providers should be thinking more holistically about the solutions, services and advice they offer their clients.

From a tactical standpoint, it’s important for plan fiduciaries to communicate to their covered service providers that they expect to receive the required 408(b)(2) disclosures no later than April 1, 2012, which is the effective date of the regulation. The information provided by the service provider should be thoroughly reviewed so that the reasonableness of plan costs and charges can be determined.

It’s important to remember that “reasonableness” should never be mistaken for lowest cost. In some cases, you may “get what you pay for.” Plan fiduciaries need to take into consideration factors such as financial stability of the service provider and the quality of services being provided into the decision-making process. This includes the access to guidance and resources to help you as a fiduciary make the best decisions for your participants.

How would the disclosure regulation, as it currently stands, help determine whether any conflicts of interest exist between service providers and third parties?

The DOL noted in the 408(b)(2) regulations that the disclosures are intended to enable plan fiduciaries to assess any actual or potential conflicts of interest that might affect the quality of the provided services. It is anticipated that disclosure of direct compensation and the source of indirect compensation will reveal the information needed for fiduciaries to uncover any actual or potential conflicts of interest with the plan’s service providers. The DOL noted in the regulations that disclosures of indirect compensation and disclosures of certain compensation paid among related parties, such as affiliates, would be helpful in assessing conflicts of interest.

What are the consequences if a fiduciary is out of compliance with ERISA 408(b)(2)?

There are financial and legal penalties for those out of compliance, but these may not be as great as reputation risk fiduciaries may face.

The following are the standard consequences for fiduciaries found non-compliant.

If the required disclosures are not made pursuant to the ERISA 408(b)(2) regulation disclosure rules, there will be a prohibited transaction violation resulting in excise tax penalties.

A fiduciary or service provider that takes part in a prohibited transaction violation is subject to a 15% penalty on the “amount involved in the transaction,” which would likely be the compensation earned by the service provider.

An additional 100% penalty is imposed on the amount involved in the transaction if the violation is not corrected within a certain period of time. Nonetheless, the regulation provides a class exemption which protects plan fiduciaries from prohibited transaction liability if their covered service provider fails to provide the required disclosure.

In these circumstances, the plan fiduciary must (a) submit a written request to the service provider for the required information and (b) notify the DOL if the service provider does not comply with the request within 90 days. The regulation also provides relief for inadvertent disclosure errors by the service provider. If a covered service provider acting in good faith and reasonable diligence makes a disclosure error or omission, there will not be a violation if the covered service provider discloses the correct information to the plan fiduciary as soon as practicable, but not later than 30 days from the date the covered service provider knows of the error or omission.